G.R. No. 75875, 75951, 75975-76 - Aurbach V

7/29/2017 G.R. No. 75875, 75951, 75975-76 | Aurbach v.
Sanitary Wares
THIRD DIVISION
[G.R. No. 75875. December 15, 1989.]
WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P.

WHITTINGHAM and CHARLES CHAMSAY, petitioners, vs.
SANITARY WARES MANUFACTURING CORPORATION,
ERNESTO V. LAGDAMEO, ERNESTO R. LAGDAMEO,
JR., ENRIQUE R. LAGDAMEO, GEORGE F. LEE, RAUL A.
BONCAN, BALDWIN YOUNG and AVELINO V. CRUZ,
respondents.
Belo, Abiera & Associates for petitioners in 75875.

Sycip, Salazar, Hernandez & Gatmaitan for Luciano E. Salazar.
[G.R. No. 75951. December 15, 1989.]
SANITARY WARES MANUFACTURING CORPORATION,

ERNESTO R. LAGDAMEO, ENRIQUE B. LAGDAMEO,
GEORGE F. LEE, RAUL A. BONCAN, BALDWIN YOUNG
and AVELINO V. CRUZ, petitioners, vs. THE COURT OF
APPEALS, WOLFGANG AURBACH, JOHN GRIFFIN,
DAVID P. WHITTINGHAM, CHARLES CHAMSAY and
LUCIANO SALAZAR, respondents.
[G.R. Nos. 75975-76. December 15, 1989.]
LUCIANO E. SALAZAR, petitioner, vs. SANITARY WARES

MANUFACTURING CORPORATION, ERNESTO V.
LAGDAMEO, ERNESTO R. LAGDAMEO, JR., ENRIQUE
R. LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN,
BALDWIN YOUNG, AVELINO V. CRUZ and the COURT
OF APPEALS, respondents.
SYLLABUS
1. COMMERCIAL LAW; JOINT VENTURE; WHETHER THERE

EXISTS A JOINT VENTURE DEPENDS UPON THE PARTIES' ACTUAL
INTENTION WHICH IS DETERMINED IN ACCORDANCE WITH THE
RULES COVERING THE INTERPRETATION AND CONSTRUCTION OF
CONTRACTS. — The rule is that whether the parties to a particular
contract have thereby established among themselves a joint venture or
some other relation depends upon their actual intention which is
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7/29/2017 G.R. No. 75875, 75951, 75975-76 | Aurbach v. Sanitary Wares
determined in accordance with the rules governing the interpretation and

construction of contracts. (Terminal Shares, Inc. v. Chicago, B. and Q.R.
Co. (DC MO) 65 F Supp 678; Universal Sales Corp. v. California Press
Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd 668)
2. ID.; ID.; ESTABLISHED IN CASE AT BAR. — In the instant cases,
our examination of important provisions of the Agreement as well as the
testimonial evidence presented by the Lagdameo and Young Group shows
that the parties agreed to establish a joint venture and not a corporation.
The history of the organization of Saniwares and the unusual
arrangements which govern its policy making body are all consistent with a
joint venture and not with an ordinary corporation. Section 5 (a) of the
agreement uses the word "designated" and not "nominated" or "elected" in
the selection of the nine directors on a six to three ratio. Each group is
assured of a fixed number of directors in the board. Moreover, ASI in its
communications referred to the enterprise as joint venture. Baldwin Young
also testified that Section 16(c) of the Agreement that "Nothing herein
contained shall be construed to constitute any of the parties hereto
partners or joint venturers in respect of any transaction hereunder" was
merely to obviate the possibility of the enterprise being treated as
partnership for tax purposes and liabilities to third parties.
3. ID.; ID.; CONCEPT OF JOINT VENTURE; DISTINGUISHED FROM
PARTNERSHIP. — The point of query, however, is whether or not that
provision is applicable to a joint venture with clearly defined agreements:
"The legal concept of a joint venture is of common law origin. It has no
precise legal definition, but it has been generally understood to mean an
organization formed for some temporary purpose. (Gates v. Megargel, 266
Fed. 811 [1920]) It is in fact hardly distinguishable from the partnership,
since their elements are similar — community of interest in the business,
sharing of profits and losses, and a mutual right of control. (Blackner v.
McDermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d. 12 289 P. 2d. 242
[1955]). The main distinction cited by most opinions in common law
jurisdictions is that the partnership contemplates a general business with
some degree of continuity, while the joint venture is formed for the
execution of a single transaction, and is thus of a temporary nature. (Tufts
v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill.
595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This
observation is not entirely accurate in this jurisdiction, since under the Civil
Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. (Art. 1783, Civil
Code). It would seem therefore that under Philippine law, a joint venture is
a form of partnership and should thus be governed by the law of
partnerships. The Supreme Court has however recognized a distinction
between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. (At p. 12, Tuazon v. Bolaños, 95 Phil.
906 [1954]) (Campos and Lopez — Campos Comments, Notes and
Selected Cases, Corporation Code 1981). Moreover, the usual rules as
regards the construction and operations of contracts generally apply to a

contract of joint venture. (O'Hara v. Harman 14 App. Dev. (167) 43 NYS
556).
4. ID.; ID.; RIGHT OF STOCKHOLDERS TO CUMULATE VOTES IN
ELECTING DIRECTORS LIES IN THE AGREEMENT OF PARTIES. —
Bearing these principles in mind, the correct view would be that the
resolution of the question of whether or not the ASI Group may vote their
additional equity lies in the agreement of the parties. The appellate court
was correct in upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the "Agreement," and the
right of each group of stockholders to cumulative voting in the process of
determining who the group's nominees would be under Section 3(a) (1) of
the "Agreement." As pointed out by SEC, Section 5(a) of the Agreement
relates to the manner of nominating the members of the board of directors
while Section 3 (a) (1) relates to the manner of voting for these nominees.
5. ID.; ANTI-DUMMY; LIMITS THE ELECTION OF ALIENS AS
MEMBERS OF THE BOARD OF DIRECTORS IN PROPORTION TO
THEIR ALLOWANCE PARTICIPATION OF THE ENTITY. — Equally
important as the consideration of the contractual intent of the parties is the
consideration as regards the possible domination by the foreign investors
of the enterprise in violation of the nationalization requirements enshrined
in the Constitution and circumvention of the Anti-Dummy Act. In this
regard, petitioner Salazar's position is that the Anti-Dummy Act allows the
ASI group to elect board directors in proportion to their share in the capital
of the entity. It is to be noted, however, that the same law also limits the
election of aliens as members of the board of directors in proportion to their
allowance participation of said entity.
DECISION
GUTIERREZ, JR., J : p
These consolidated petitions seek the review of the amended decision of

the Court of Appeals in CA-G.R. SP Nos. 05604 and 05617 which set
aside the earlier decision dated June 5, 1986, of the then Intermediate
Appellate Court and directed that in all subsequent elections for directors
of Sanitary Wares Manufacturing Corporation (Saniwares), American
Standard Inc. (ASI) cannot nominate more than three (3) directors; that the
Filipino stockholders shall not interfere in ASI's choice of its three (3)
nominees; that, on the other hand, the Filipino stockholders can nominate
only six (6) candidates and in the event they cannot agree on the six (6)
nominees, they shall vote only among themselves to determine who the six
(6) nominees will be, with cumulative voting to be allowed but without
interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was incorporated for the

primary purpose of manufacturing and marketing sanitary wares. One of
the incorporators, Mr. Baldwin Young went abroad to look for foreign
partners, European or American who could help in its expansion plans. On
August 15, 1962, ASI, a foreign corporation domiciled in Delaware, United
States entered into an Agreement with Saniwares and some Filipino
investors whereby ASI and the Filipino investors agreed to participate in
the ownership of an enterprise which would engage primarily in the
business of manufacturing in the Philippines and selling here and abroad
vitreous china and sanitary wares. The parties agreed that the business
operations in the Philippines shall be carried on by an incorporated
enterprise and that the name of the corporation shall initially be "Sanitary
Wares Manufacturing Corporation." LibLex
The Agreement has the following provisions relevant to the issues in these
cases on the nomination and election of the directors of the corporation:
"3. Articles of Incorporation
(a) The Articles of Incorporation of the
Corporation shall be substantially in the form annexed
hereto as Exhibit A and, insofar as permitted under
Philippine law, shall specifically provide for.
(1) Cumulative voting for directors:
xxx xxx xxx
"5. Management
(a) The management of the Corporation shall be
vested in a Board of Directors, which shall consist of nine
individuals. As long as American-Standard shall own at
least 30% of the outstanding stock of the Corporation,
three of the nine directors shall be designated by
American-Standard, and the others six: shall be designated
by the other stockholders of the Corporation. (pp. 51 & 53,
Rollo of 75875).
At the request of ASI, the agreement contained provisions designed to
protect it as a minority group, including the grant of veto powers over a
number of corporate acts and the right to designate certain officers, such
as a member of the Executive Committee whose vote was required for
important corporate transactions.
Later, the 30% capital stock of ASI was increased to 40%. The corporation
was also registered with the Board of Investments for availment of
incentives with the condition that at least 60% of the capital stock of the
corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino investors and the
American corporation prospered. Unfortunately, with the business
successes, there came a deterioration of the initially harmonious relations
between the two groups. According to the Filipino group, a basic
disagreement was due to their desire to expand the export operations of
the company to which ASI objected as it apparently had other subsidiaries

of joint venture groups in the countries where Philippine exports were
contemplated. On March 8, 1983, the annual stockholders' meeting was
held. The meeting was presided by Baldwin Young. The minutes were
taken by the Secretary, Avelino Cruz. After disposing of the preliminary
items in the agenda, the stockholders then proceeded to the election of the
members of the board of directors. The ASI group nominated three
persons namely; Wolfgang Aurbach, John Griffin and David P.
Whittingham. The Philippine investors nominated six, namely; Ernesto
Lagdameo, Sr., Raul A. Boncan, Ernesto R. Lagdameo, Jr., George F. Lee,
and Baldwin Young. Mr. Eduardo R. Ceniza then nominated Mr. Luciano E.
Salazar, who in turn nominated Mr. Charles Chamsay. The chairman,
Baldwin Young ruled the last two nominations out of order on the basis of
section 5 (a) of the Agreement, the consistent practice of the parties during
the past annual stockholders' meetings to nominate only nine persons as
nominees for the nine-member board of directors, and the legal advice of
Saniwares' legal counsel. The following events then, transpired:
. . . . There were protests against the action of the Chairman and

heated arguments ensued. An appeal was made by the ASI
representative to the body of stockholders present that a vote be
taken on the ruling of the Chairman. The Chairman, Baldwin
Young, declared the appeal out of order and no vote on the ruling
was taken. The Chairman then instructed the Corporate Secretary
to cast all the votes present and represented by proxy equally for
the 6 nominees of the Philippine Investors and the 3 nominees of
ASI, thus effectively excluding the 2 additional persons
nominated, namely, Luciano E. Salazar and Charles Chamsay.
The ASI representative, Mr. Jaqua, protested the decision of the
Chairman and announced that all votes accruing to ASI shares, a
total of 1,329,695 (p. 27, Rollo, AC-G.R. SP No. 05617) were
being cumulatively voted for the three ASI nominees and Charles
Chamsay, and instructed the Secretary to so vote. Luciano E.
Salazar and other proxy holders announced that all the votes
owned by and or represented by them 467,197 shares (p. 27,
Rollo, AC-G.R. SP No. 05617) were being voted cumulatively in
favor of Luciano E. Salazar. The Chairman, Baldwin Young,
nevertheless instructed the Secretary to cast all votes equally in
favor of the three ASI nominees, namely, Wolfgang Aurbach, John
Griffin and David Whittingham, and the six originally nominated by
Rogelio Vinluan, namely, Ernesto Lagdameo, Sr., Raul Boncan,
Ernesto Lagdameo, Jr., Enrique Lagdameo, George F. Lee, and
Baldwin Young. The Secretary then certified for the election of the
following — Wolfgang Aurbach, John Griffin, David Whittingham,
Ernesto Lagdameo, Sr., Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul A. Boncan, Baldwin Young. The
representative of ASI then moved to recess the meeting which
was duly seconded. There was also a motion to adjourn (p. 28,
Rollo, Ac-G.R. SP No. 05617). This motion to adjourn was
accepted by the Chairman, Baldwin Young, who announced that
the motion was carried and declared the meeting adjourned.

Protests against the adjournment were registered and having
been ignored, Mr. Jaqua, the ASI representative, stated that the
meeting was not adjourned but only recessed and that the
meeting would be reconvened in the next room. The Chairman
then threatened to have the stockholders who did not agree to the
decision of the Chairman on the casting of votes bodily thrown
out. The ASI Group, Luciano E. Salazar and other stockholders,
allegedly representing 53 or 54% of the shares of Saniwares,
decided to continue the meeting at the elevator lobby of the
American Standard Building. The continued meeting was presided
by Luciano E. Salazar, while Andres Gatmaitan acted as
Secretary. On the basis of the cumulative votes cast earlier in the
meeting, the ASI Group nominated its four nominees; Wolfgang
Aurbach, John Griffin, David Whittingham and Charles Chamsay.
Luciano E. Salazar voted for himself, thus the said five directors
were certified as elected directors by the Acting Secretary, Andres
Gatmaitan, with the explanation that there was a tie among the
other six (6) nominees for the four (4) remaining positions of
directors and that the body decided not to break the tie." (pp. 37-
39, Rollo of 75975-76)
These incidents triggered off the filing of separate petitions by the parties
with the Securities and Exchange Commission (SEC). The first petition
filed was for preliminary injunction by Saniwares, Ernesto V. Lagdameo,
Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr., Enrique
Lagdameo and George F. Lee against Luciano Salazar and Charles
Chamsay. The case was denominated as SEC Case No. 2417. The
second petition was for quo warranto and application for receivership by
Wolfgang Aurbach, John Griffin, David Whittingham, Luciano E. Salazar
and Charles Chamsay against the group of Young and Lagdameo
(petitioners in SEC Case No. 2417) and Avelino F. Cruz. The case was
docketed as SEC Case No. 2718. Both sets of parties except for Avelino
Cruz claimed to be the legitimate directors of the corporation. LLphil
The two petitions were consolidated and tried jointly by a hearing officer
who rendered a decision upholding the election of the Lagdameo Group
and dismissing the quo warranto petition of Salazar and Chamsay. The ASI
Group and Salazar appealed the decision to the SEC en banc which
affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate appeals with the
Intermediate Appellate Court by Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay (docketed as AC-G.R. SP No. 05604)
and by Luciano E. Salazar (docketed as AC-G.R. SP No. 05617). The
petitions were consolidated and the appellate court in its decision ordered
the remand of the case to the Securities and Exchange Commission with
the directive that a new stockholders' meeting of Saniwares be ordered
convoked as soon as possible, under the supervision of the Commission.
Upon a motion for reconsideration filed by the appellees (Lagdameo

Group) the appellate court (Court of Appeals) rendered the questioned
amended decision.
Petitioners Wolfgang Aurbach, John Griffin, David P. Whittingham and
Charles Chamsay in G.R. No. 75875 assign the following errors:
I. THE COURT OF APPEALS, IN EFFECT, UPHELD THE
ALLEGED ELECTION OF PRIVATE RESPONDENTS AS
MEMBERS OF THE BOARD OF DIRECTORS OF SANIWARES
WHEN IN FACT THERE WAS NO ELECTION AT ALL.
II. THE COURT OF APPEALS PROHIBITS THE
STOCKHOLDERS FROM EXERCISING THEIR FULL VOTING
RIGHTS REPRESENTED BY THE NUMBER OF SHARES IN
SANIWARES, THUS DEPRIVING PETITIONERS AND THE
CORPORATION THEY REPRESENT OF THEIR PROPERTY
RIGHTS WITHOUT DUE PROCESS OF LAW.
III. THE COURT OF APPEALS IMPOSES CONDITIONS
AND READS PROVISIONS INTO THE AGREEMENT OF THE
PARTIES WHICH WERE NOT THERE, WHICH ACTION IT
CANNOT LEGALLY DO. (p. 17, Rollo — 75875).
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76 assails the amended
decision on the following grounds:
"11.1 That Amended Decision would sanction the CA's
disregard of binding contractual agreements entered into by
stockholders and the replacement of the conditions of such
agreements with terms never contemplated by the stockholders
but merely dictated by the CA.
"11.2 The Amended decision would likewise sanction the
unlawful deprivation of the property rights of stockholders without
due process of law in order that a favored group of stockholders
may be illegally benefited and guaranteed a continuing monopoly
of the control of a corporation." (pp. 14-15, Rollo — 75975-76).
On the other hand, the petitioners in G.R. No. 75951 contend that:
I
"THE AMENDED DECISION OF THE RESPONDENT
COURT, WHILE RECOGNIZING THAT THE
STOCKHOLDERS OF SANIWARES ARE DIVIDED INTO
TWO BLOCKS, FAILS TO FULLY ENFORCE THE BASIC
INTENT OF THE AGREEMENT AND THE LAW.
II
"THE AMENDED DECISION DOES NOT CATEGORICALLY
RULE THAT PRIVATE PETITIONERS HEREIN WERE THE
DULY ELECTED DIRECTORS DURING THE 8 MARCH
1983 ANNUAL STOCKHOLDERS MEETING OF
SANIWARES." (P. 24, Rollo — 75951).
The issues raised in the petitions are interrelated, hence, they are
discussed jointly.
The main issue hinges on who were the duly elected directors of
Saniwares for the year 1983 during its annual stockholders' meeting held
on March 8, 1983. To answer this question the following factors should be
determined: (1) the nature of the business established by the parties —
whether it was a joint venture or a corporation and (2) whether or not the
ASI Group may vote their additional 10% equity during elections of
Saniwares' board of directors. LLjur
The rule is that whether the parties to a particular contract have thereby
established among themselves a joint venture or some other relation
depends upon their actual intention which is determined in accordance with
the rules governing the interpretation and construction of contracts.
(Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO) 65 F Supp
678; Universal Sales Corp. v. California Press Mfg. Co. 20 Cal. 2nd 751,
128 P 2nd 668)
The ASI Group and petitioner Salazar (G.R. Nos. 75975-76) contend that
the actual intention of the parties should be viewed strictly on the
"Agreement" dated August 15, 1962 wherein it is clearly stated that the
parties' intention was to form a corporation and not a joint venture.
They specifically mention number 16 under Miscellaneous Provisions
which states:
xxx xxx xxx
"(c) nothing herein contained shall be construed to constitute
any of the parties hereto partners or joint venturers in respect of
any transaction hereunder." (At p. 66, Rollo — G.R. No. 75875)
They object to the admission of other evidence which tends to show that
the parties' agreement was to establish a joint venture presented by the
Lagdameo and Young Group on the ground that it contravenes the parol
evidence rule under section 7, Rule 130 of the Revised Rules of Court.
According to them, the Lagdameo and Young Group never pleaded in their
pleading that the "Agreement" failed to express the true intent of the
parties.
The parol evidence Rule under Rule 130 provides:
"Evidence of written agreements — When the terms of an
agreement have been reduced to writing, it is to be considered as
containing all such terms, and therefore, there can be, between
the parties and their successors in interest, no evidence of the
terms of the agreement other than the contents of the writing,
except in the following cases:
(a) Where a mistake or imperfection of the writing, or its
failure to express the true intent and agreement of the parties or
the validity of the agreement is put in issue by the pleadings.
(b) When there is an intrinsic ambiguity in the writing.
Contrary to ASI Group's stand, the Lagdameo and Young Group pleaded in
their Reply and Answer to Counterclaim in SEC Case No. 2417 that the
Agreement failed to express the true intent of the parties, to wit:
xxx xxx xxx
"4. While certain provisions of the Agreement would make it
appear that the parties thereto disclaim being partners or joint
venturers such disclaimer is directed at third parties and is not
inconsistent with, and does not preclude, the existence of two
distinct groups of stockholders in Saniwares one of which (the
Philippine Investors) shall constitute the majority, and the other
(ASI) shall constitute the minority stockholder. In any event, the
evident intention of the Philippine Investors and ASI in entering
into the Agreement is to enter into a joint venture enterprise, and if
some words in the Agreement appear to be contrary to the
evident intention of the parties, the latter shall prevail over the
former (Art. 1370, New Civil Code). The various stipulations of a
contract shall be interpreted together attributing to the doubtful
ones that sense which may result from all of them taken jointly
(Art. 1374, New Civil Code). Moreover, in order to judge the
intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (Art. 1371, New
Civil Code). (Part I, Original Records, SEC Case No. 2417).
It has been ruled:

"In an action at law, where there is evidence tending to prove that
the parties joined their efforts in furtherance of an enterprise for
their joint profit, the question whether they intended by their
agreement to create a joint adventure, or to assume some other
relation is a question of fact for the jury. (Binder v. Kessler v 200
App. Div. 40, 192 NYS 653; Pyroa v. Brownfield (Tex. Civ. A.) 238
SW 725; Hoge v. George, 27 Wyo, 423, 200 P 96 33 C.J. p. 871).
In the instant cases, our examination of important provisions of the
Agreement as well as the testimonial evidence presented by the
Lagdameo and Young Group shows that the parties agreed to establish a
joint venture and not a corporation. The history of the organization of
Saniwares and the unusual arrangements which govern its policy making
body are all consistent with a joint venture and not with an ordinary
corporation. As stated by the SEC:
"According to the unrebutted testimony of Mr. Baldwin Young, he
negotiated the Agreement with ASI in behalf of the Philippine
nationals. He testified that ASI agreed to accept the role of
minority vis-a-vis the Philippine National group of investors, on the
condition that the Agreement should contain provisions to protest
ASI as the minority.
"An examination of the Agreement shows that certain provisions
were included to protect the interests of ASI as the minority. For
example, the vote of 7 out of 9 directors is required in certain
enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement].

ASI is contractually entitled to designate a member of the
Executive Committee and the vote of this member is required for
certain transactions [Sec. 3 (b) (i)].
"The Agreement also requires a 75% super-majority vote for the
amendment of the articles and by-laws of Saniwares [Sec. 3 (a)
(iv) and (b) (iii)]. ASI is also given the right to designate the
president and plant manager [Sec. 5 (6)]. The Agreement further
provides that the sales policy of Saniwares shall be that which is
normally followed by ASI [Sec. 13 (a)] and that Saniwares should
not export "Standard" products otherwise than through ASI's
Export Marketing Services [Sec. 13 (6)]. Under the Agreement,
ASI agreed to provide technology and know-how to Saniwares
and the latter paid royalties for the same. (At p. 2).
xxx xxx xxx
"It is pertinent to note that the provisions of the Agreement
requiring a 7 out of 9 votes of the board of directors for certain
actions, in effect gave ASI (which designates 3 directors under the
Agreement) an effective veto power. Furthermore, the grant to ASI
of the right to designate certain officers of the corporation; the
super-majority voting requirements for amendments of the articles
and by-laws; and most significantly to the issues of this case, the
provision that ASI shall designate 3 out of the 9 directors and the
other stockholders shall designate the other 6, clearly indicate that
— 1) there are two distinct groups in Saniwares, namely ASI,
which owns 40% of the capital stock and the Philippine National
stockholders who own the balance of 60%, and that 2) ASI is
given certain protections as the minority stockholder.
Premises considered, we believe that under the Agreement there
are two groups of stockholders who established a corporation with
provisions for a special contractual relationship between the
parties, i.e., ASI and the other stockholders." (pp. 4-5)
Section 5 (a) of the agreement uses the word "designated" and not
"nominated" or "elected" in the selection of the nine directors on a six to
three ratio. Each group is assured of a fixed number of directors in the
board.
Moreover, ASI in its communications referred to the enterprise as joint
venture. Baldwin Young also testified that Section 16(c) of the Agreement
that "Nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any transaction
hereunder" was merely to obviate the possibility of the enterprise being
treated as partnership for tax purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to develop the industrial
and manufacturing capacities of a local firm are constrained to seek the
technology and marketing assistance of huge multinational corporations of
the developed world. Arrangements are formalized where a foreign group
becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance. However,
there is always a danger from such arrangements. The foreign group may,
from the start, intend to establish its own sole or monopolistic operations
and merely uses the joint venture arrangement to gain a foothold or test
the Philippine waters, so to speak. Or the covetousness may come later.
As the Philippine firm enlarges its operations and becomes profitable, the
foreign group undermines the local majority ownership and actively tries to
completely or predominantly take over the entire company. This
undermining of joint ventures is not consistent with fair dealing to say the
least. To the extent that such subversive actions can be lawfully prevented,
the courts should extend protection especially in industries where
constitutional and legal requirements reserve controlling ownership to
Filipino citizens. cdll
The Lagdameo Group stated in their appellees' brief in the Court of

Appeals:
"In fact, the Philippine Corporation Code itself recognizes the right
of stockholders to enter into agreements regarding the exercise of
their voting rights.
"'Sec. 100. Agreements by stockholders. —
xxx xxx xxx
"'2. An agreement between two or more stockholders, if in
writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall be
voted as therein provided, or as they may agree, or as determined
in accordance with a procedure agreed upon by them.'
"Appellants contend that the above provision is included in the
Corporation Code's chapter on close corporations and Saniwares
cannot be a close corporation because it has 95 stockholders.
Firstly, although Saniwares had 95 stockholders at the time of the
disputed stockholders meeting, these 95 stockholders are not
separate from each other but are divisible into groups
representing a single identifiable interest. For example, ASI, its
nominees and lawyers count for 13 of the 95 stockholders. The
Young/Yutivo family count for another 13 stockholders, the Cham
family for 8 stockholders, the Santos family for 9 stockholders, the
Dy family for 7 stockholders, etc. If the members of one family
and/or business or interest group are considered as one (which, it
is respectfully submitted, they should be for purposes of
determining how closely held Saniwares is), there were as of 8
March 1983, practically only 17 stockholders of Saniwares.
(Please refer to discussion in pp. 5 to 6 of appellees' Rejoinder
Memorandum dated 11 December 1984 and Annex "A" thereof).
"Secondly, even assuming that Saniwares is technically not a
close corporation because it has more than 20 stockholders, the
undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue
or a widely held corporation.
"In the United States, many courts have taken a realistic approach
to joint venture corporations and have not rigidly applied principles
of corporation law designed primarily for public issue corporations.
These courts have indicated that express arrangements between
corporate joint ventures should be construed with less emphasis
on the ordinary rules of law usually applied to corporate entities
and with more consideration given to the nature of the agreement
between the joint venturers (Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335; Chicago, M & St. P. Ry v.
Des Moines Union Ry; 254 Ass'n. 247 US. 490'; Seaboard Airline
Ry v. Atlantic Coast Line Ry; 240 N.C. 495, 82 S.E. 2d 771;
Deboy v. Harris, 207 Md., 212, 113 A 2d 903; Hathway v. Porter
Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W. 571; Beardsley v.
Beardsley, 138 U.S. 262; "The Legal Status of Joint Venture
Corporations", 11 Vand. Law Rev., p. 680, 1958). These American
cases dealt with legal questions as to the extent to which the
requirements arising from the corporate form of joint venture
corporations should control, and the courts ruled that substantial
justice lay with those litigants who relied on the joint venture
agreement rather than the litigants who relied on the orthodox
principles of corporation law.
"As correctly held by the SEC Hearing Officer:
"'It is said that participants in a joint venture, in organizing the joint
venture deviate from the traditional pattern of corporation
management. A noted authority has pointed out that just as in
close corporations, shareholders' agreements in joint venture
corporations often contain provisions which do one or more of the
following: (1) require greater than majority vote for shareholder
and director action; (2) give certain shareholders or groups of
shareholders power to select a specified number of directors; (3)
give to the shareholders control over the selection and retention of
employees; and (4) set up a procedure for the settlement of
disputes by arbitration (See I O'Neal, Close Corporations, 1971
ed., Section 1.06a, pp. 15-16) (Decision of SEC Hearing Officer,
p. 16)'
"Thirdly, paragraph 2 of Sec. 100 of the Corporation Code does
not necessarily imply that agreements regarding the exercise of
voting rights are allowed only in close corporations. As Campos
and Lopez-Campos explain:
"'Paragraph 2 refers to pooling and voting agreements in
particular. Does this provision necessarily imply that these
agreements can be valid only in close corporations as defined by
the Code? Suppose that a corporation has twenty five
stockholders, and therefore cannot qualify as a close corporation
under section 96, can some of them enter into an agreement to
vote as a unit in the election of directors? It is submitted that there
is no reason for denying stockholders of corporations other than
close ones the right to enter into voting or pooling agreements to
protect their interests, as long as they do not intend to commit any
wrong, or fraud on the other stockholders not parties to the
agreement. Of course, voting or pooling agreements are perhaps

more useful and more often resorted to in close corporations. But
they may also be found necessary even in widely held
corporations. Moreover, since the Code limits the legal meaning of
close corporations to those which comply with the requisites laid
down by section 96, it is entirely possible that a corporation which
is in fact a close corporation will not come within the definition. In
such case, its stockholders should not be precluded from entering
into contracts like voting agreements if these are otherwise valid.
(Campos & Lopez-Campos, op cit, p. 405)'
"In short, even assuming that sec. 5(a) of the Agreement relating
to the designation or nomination of directors restricts the right of
the Agreement's signatories to vote for directors, such contractual
provision, as correctly held by the SEC, is valid and binding upon
the signatories thereto, which include appellants." (Rollo G.R. No.
75951, pp. 90-94).
In regard to the question as to whether or not the ASI group may vote their
additional equity during elections of Saniwares' board of directors, the
Court of Appeals correctly stated:
"As in other joint venture companies, the extent of ASI's
participation in the management of the corporation is spelled out
in the Agreement. Section 5(a) hereof says that three of the nine
directors shall be designated by ASI and the remaining six by the
other stockholders, i.e., the Filipino stockholders. This allocation
of board seats is obviously in consonance with the minority
position of ASI.
"Having entered into a well-defined contractual relationship, it is
imperative that the parties should honor and adhere to their
respective rights and obligations thereunder. Appellants seem to
contend that any allocation of board seats, even in joint venture
corporations, are null and void to the extent that such may
interfere with the stockholder's rights to cumulative voting as
provided in Section 24 of the Corporation Code. This Court should
not be prepared to hold that any agreement which curtails in any
way cumulative voting should be struck down, even if such
agreement has been freely entered into by experienced
businessmen and do not prejudice those who are not parties
thereto. It may well be that it would be more cogent to hold, as the
Securities and exchange Commission has held in the decision
appealed from, that cumulative voting rights may be voluntary
waived by stockholders who enter into special relationships with
each other to pursue and implement specific purposes, as in joint
venture relationships between foreign and local stockholders, so
long as such agreements do not adversely affect third parties.
"In any event, it is believed that we are not here called upon to
make a general rule on this question. Rather, all that needs to be
done is to give life and effect to the particular contractual rights
and obligations which the parties have assumed for themselves.
"On the one hand, the clearly established minority position of ASI
and the contractual allocation of board seats cannot be
disregarded. On the other hand, the rights of the stockholders to
cumulative voting should also be protected.
"In our decision sought to be reconsidered, we opted to uphold
the second over the first. Upon further reflection, we feel that the
proper and just solution to give due consideration to both factors
suggests itself quite clearly. This Court should recognize and
uphold the division of the stockholders into two groups, and at the
same time uphold the right of the stockholders within each group
to cumulative voting in the process of determining who the group's
nominees would be. In practical terms, as suggested by appellant
Luciano E. Salazar himself, this means that if the Filipino
stockholders cannot agree who their six nominees will be, a vote
would have to be taken among the Filipino stockholders only.
During this voting, each Filipino stockholder can cumulate his
votes. ASI, however, should not be allowed to interfere in the
voting within the Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is allowed to designate
under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the
contractual intent of the parties.
"Such a ruling will give effect to both the allocation of the board
seats and the stockholder's right to cumulative voting. Moreover,
this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-
Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if
ASI is allowed to nominate more than three directors." (Rollo —
75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate their theory that the
ASI Group has the right to vote their additional equity pursuant to Section
24 of the Corporation Code which gives the stockholders of a corporation
the right to cumulate their votes in electing directors. Petitioner Salazar
adds that this right if granted to the ASI Group would not necessarily mean
a violation of the Anti-Dummy Act (Commonwealth Act 108, as amended).
He cites section 2-a thereof which provides:
"And provided finally that the election of aliens as members of the
board of directors or governing body of corporations or
associations engaging in partially nationalized activities shall be
allowed in proportion to their allowable participation or share in
the capital of such entities. (amendments introduced by
Presidential Decree 715, section 1, promulgated May 28, 1975)"
The ASI Group's argument is correct within the context of Section 24 of the
Corporation Code. The point of query, however, is whether or not that
provision is applicable to a joint venture with clearly defined agreements:
"The legal concept of a joint venture is of common law origin. It

has no precise legal definition, but it has been generally
understood to mean an organization formed for some temporary
purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is in fact
hardly distinguishable from the partnership, since their elements
are similar — community of interest in the business, sharing of
profits and losses, and a mutual right of control. (Blackner v.
McDermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P.
2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P. 2d.
12 289 P. 2d. 242 [1955]). The main distinction cited by most
opinions in common law jurisdictions is that the partnership
contemplates a general business with some degree of continuity,
while the joint venture is formed for the execution of a single
transaction, and is thus of a temporary nature. (Tufts v. Mann. 116
Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595,
71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]).
This observation is not entirely accurate in this jurisdiction, since
under the Civil Code, a partnership may be particular or universal,
and a particular partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would seem therefore that
under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme
Court has however recognized a distinction between these two
business forms, and has held that although a corporation cannot
enter into a partnership contract, it may however engage in a joint
venture with others. (At p. 12, Tuazon v. Bolaños, 95 Phil. 906
[1954]) (Campos and Lopez — Campos Comments, Notes and
Selected Cases, Corporation Code 1981).
Moreover, the usual rules as regards the construction and operations of
contracts generally apply to a contract of joint venture. (O'Hara v. Harman
14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would be that the
resolution of the question of whether or not the ASI Group may vote their
additional equity lies in the agreement of the parties.
Necessarily, the appellate court was correct in upholding the agreement of
the parties as regards the allocation of director seats under Section 5 (a) of
the "Agreement," and the right of each group of stockholders to cumulative
voting in the process of determining who the group's nominees would be
under Section 3(a) (1) of the "Agreement." As pointed out by SEC, Section
5(a) of the Agreement relates to the manner of nominating the members of
the board of directors while Section 3 (a) (1) relates to the manner of voting
for these nominees.
This is the proper interpretation of the Agreement of the parties as regards
the election of members of the board of directors.
To allow the ASI Group to vote their additional equity to help elect even a
Filipino director who would be beholden to them would obliterate their
minority status as agreed upon by the parties. As aptly stated by the
appellate court:
". . . . ASI, however, should not be allowed to interfere in the

voting within the Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is allowed to designate
under the Agreement, and may even be able to get a majority of
the board seats, a result which is clearly contrary to the
contractual intent of the parties.
"Such a ruling will give effect to both the allocation of the board
seats and the stockholder's right to cumulative voting. Moreover,
this ruling will also give due consideration to the issue raised by
the appellees on possible violation or circumvention of the Anti-
Dummy Law (Com. Act No. 108, as amended) and the
nationalization requirements of the Constitution and the laws if
ASI is allowed to nominate more than three directors." (At p. 39,
Rollo, 75875).
Equally important as the consideration of the contractual intent of the
parties is the consideration as regards the possible domination by the
foreign investors of the enterprise in violation of the nationalization
requirements enshrined in the Constitution and circumvention of the Anti-
Dummy Act. In this regard, petitioner Salazar's position is that the Anti-
Dummy Act allows the ASI group to elect board directors in proportion to
their share in the capital of the entity. It is to be noted, however, that the
same law also limits the election of aliens as members of the board of
directors in proportion to their allowance participation of said entity. In the
instant case, the foreign Group (ASI) was limited to designate three
directors. This is the allowable participation of the ASI Group. Hence, in
future dealings, this limitation of six to three board seats should always be
maintained as long as the joint venture agreement exists considering that
in limiting 3 board seats in the 9-man board of directors there are
provisions already agreed upon and embodied in the parties' Agreement to
protect the interests arising from the minority status of the foreign
investors. LexLib
With these findings, we affirm the decisions of the SEC Hearing Officer and
SEC which were impliedly affirmed by the appellate court declaring
Messrs. Wolfgang Aurbach, John Griffin, David P. Whittingham, Ernesto V.
Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly elected directors of
Saniwares at the March 8, 1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young Group (petitioners in G.R.
No. 75951 ) object to a cumulative voting during the election of the board
of directors of the enterprise as ruled by the appellate court and submits
that the six (6) directors allotted the Filipino stockholders should be
selected by consensus pursuant to section 5 (a) of the Agreement which
uses the word "designate" meaning "nominate, delegate or appoint."
They also stress the possibility that the ASI Group might take control of the
enterprise if the Filipino stockholders are allowed to select their nominees
separately and not as a common slot determined by the majority of their
group.
Section 5(a) of the Agreement which uses the word designates in the
allocation of board directors should not be interpreted in isolation. This
should be construed in relation to section 3 (a) (1 ) of the Agreement. As
we stated earlier, section 3(a) (1 ) relates to the manner of voting for these
nominees which is cumulative voting while section 5(a) relates to the
manner of nominating the members of the board of directors. The
petitioners in G.R. No. 75951 agreed to this procedure, hence, they cannot
now impugn its legality.
The insinuation that the ASI Group may be able to control the enterprise
under the cumulative voting procedure cannot, however, be ignored. The
validity of the cumulative voting procedure is dependent on the directors
thus elected being genuine members of the Filipino group, not voters
whose interest is to increase the ASI share in the management of
Saniwares. The joint venture character of the enterprise must always be
taken into account, so long as the company exists under its original
agreement. Cumulative voting may not be used as a device to enable ASI
to achieve stealthily or indirectly what they cannot accomplish openly.
There are substantial safeguards in the Agreement which are intended to
preserve the majority status of the Filipino investors as well as to maintain
the minority status of the foreign investors group as earlier discussed. They
should be maintained. cdll
WHEREFORE, the petitions in G.R. Nos. 75975-76 and G.R. No. 75875
are DISMISSED and the petition in G.R. No. 75951 is partly GRANTED.
The amended decision of the Court of Appeals is MODIFIED in that
Messrs. Wolfgang Aurbach, John Griffin, David Whittingham, Ernesto V.
Lagdameo, Baldwin Young, Raul A. Boncan, Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee are declared as the duly elected
directors of Saniwares at the March 8, 1983 annual stockholders' meeting.
In all other respects, the questioned decision is AFFIRMED. Costs against
the petitioners in G.R. Nos. 75975-76 and G.R. No. 75875.
SO ORDERED.
Fernan C.J., Bidin and Cortés, JJ., concur.
Feliciano, J., took no part.

G.R. No. 75875, 75951, 75975-76 - Aurbach V

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7/29/2017 G.R. No. 75875, 75951, 75975-76 | Aurbach v.

[G.R. No. 75875. December 15, 1989.]

WOLFGANG AURBACH, JOHN GRIFFIN, DAVID P.

Belo, Abiera & Associates for petitioners in 75875.

SANITARY WARES MANUFACTURING CORPORATION,

[G.R. Nos. 75975-76. December 15, 1989.]

LUCIANO E. SALAZAR, petitioner, vs. SANITARY WARES

1. COMMERCIAL LAW; JOINT VENTURE; WHETHER THERE

determined in accordance with the rules governing the interpretation and

regards the construction and operations of contracts generally apply to a

These consolidated petitions seek the review of the amended decision of

In 1961, Saniwares, a domestic corporation was incorporated for the

the company to which ASI objected as it apparently had other subsidiaries

. . . . There were protests against the action of the Chairman and

the motion was carried and declared the meeting adjourned.

Upon a motion for reconsideration filed by the appellees (Lagdameo

It has been ruled:

enumerated corporate acts [Sec. 3 (b) (ii) (a) of the Agreement].

The Lagdameo Group stated in their appellees' brief in the Court of

agreement. Of course, voting or pooling agreements are perhaps

"The legal concept of a joint venture is of common law origin. It

". . . . ASI, however, should not be allowed to interfere in the

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